Tuesday, June 19, 2007

Bear Stearns (BSC) and Merrill (MER)

What would you do if someone owed you lots of money - say, on the order of hundreds of millions of dollars? Merrill Lynch wants its money back from Bear Stearns. And as the days pass the numbers are going up! The Wall Street Journal reports Merrill is now looking to sell $850 mln worth of collateral assets tied to the sinking Bear High-Grade Structured Credit Strategies Enhanced Leverage Fund. Merrill had originally sought to sell $400 mln in assets on Monday, but delayed the sale to hear Bear's plan to recapitalize the fund. Merrill's not biting and the assets will be sold starting tomorrow afternoon.

WSJ:Merrill to Dump Bear Fund's Assets.

Thus far, this Bear fund meltdown has been orderly, but as it gets closer to being a complete shutdown it will be interesting to see if there's any market angst. BSC is down about 2% tonight.

It seemed like a good idea.. benefit from a drop in subprime bbb- as tracked by ABX. But the chart below is a road map that shows a few key problems for a short play vs ABX. The late February swoon that corresponded with the tumble in the stock market led to a full opening of the liquidity spigot whether by way of the Fed's Discount Window, or even via Term Investment Options, or TIOs from the Treasury. Then in mid-April a coordinated bailout effort was announced to pump billions more into the system by way of entities like Freddie to shore up subprime areas of damage. That's what really had to have damned the Bear fund to crippled status as the ABX surged above 75. Sudden liquidity can ruin your fund.

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